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New Building Bond and Post Completion Inspection Regime for Strata Developments in NSW

Defective building work in new multi-level apartments remains a thorn in the side for the NSW Government. As multi-level apartments are exempted from the insurance under the Home Building Compensation Fund, purchasers of apartments can be left without a remedy for defective building work in the event of builder insolvency. Persistent lobbying and consumer protection imperatives have led to significant reforms to the NSW strata laws, introducing a new regime of developer bonds and compulsory post completion inspections. The reforms are set out in Part 11 of the Strata Schemes Management Act 2015 (Act). The Act received assent last year, but it has not yet commenced (more on that later).

Post Completion Inspection Regime

Building Inspectors

A developer of a strata scheme will be obliged to have the building work inspected twice after completion, by an independent building inspector approved by the owners corporation.1 If the developer and the owners corporation cannot agree on the inspector, the Secretary of the Department of Finance, Services and Innovation (Secretary) is to arrange for the appointment.

A new Australian Standard is being developed for the accreditation of the inspectors contemplated by this new regime. The new standard is due to issue in March 2017. The draft Strata Schemes Management Regulation 2016 (Regulation) provides that building inspectors must be appointed from strata inspection panels established by:

the Housing Industry Association

the Master Builders Association of New South Wales

the Australian Institute of Building

the Australian Institute of Building Surveyors

the Australian Institute of Building Consultants

Engineers Australia

the Australian Institute of Architects

the Association of Accredited Certifiers.

That list is not final. It seems likely that more industry associations and professional institutions will be included before the Regulations commence. It is also quite possible that the final version of the regulations will differ in other respects from the draft. On 8 July 2016 the Department advised that the “final Regulations will be published in the coming weeks”

Interim Report

The building inspector is to inspect the work and provide an interim report, not earlier than 15 months and not later than 18 months after the completion of the building work (deemed to be the date the occupation certificate issues). The inspection will not be open ended but the categories of work to be inspected are yet to be announced. The interim report must identify any defective building work of the type required to be reported on and if reasonably practicable, identify the cause of that defective building work.

Rectification of Defective Work

The person who carried out defective building work is permitted to enter any part of the strata scheme necessary to rectify the work at any time before the final inspection. The Act includes a regime for access to the site to enable this to occur. The provision of access will be critical to the scheme’s success. The timeline below shows that the builder will have just a few months between the interim and final reports to both obtain entry and rectify all defects.

Final Report

The developer must also arrange for the building inspector to carry out a final inspection and provide a final report on the building work. A final inspection is required to be carried out and a report provided not earlier than 21 months and not later than 2 years after the completion of the works. The final report is to be in the form approved by the Secretary and contain an assessment of the likely cost of rectifying defective work not rectified since the interim report or that arises from rectification of any such work.

The final report must not contain any new matter that relates to defective building work not identified in the interim report, other than work arising from rectification of building work identified in the interim report.

Under the new regime a developer is required to lodge a building bond of 2% of the building contract price with the Secretary.

The bond is to be a bank guarantee or an insurance bond with a maturity date of three years and will need to be lodged with the Secretary before the PCA may issue the occupation certificate.

The Secretary will apply the bond so its proceeds are available:

to the owners corporation to the extent necessary to meet the costs of rectifying defective works identified in the final inspection report; or

by returning it to the developer to the extent its proceeds are not required for the rectification of defective work identified in the final inspection report.

The building bond (or balance thereof) must be paid out to the owners corporation or refunded to the developer (or both) not later than 2 years after the completion of the building work or within 60 days of the final inspection report, whichever occurs later.

Importantly, the Secretary may refuse a claim on the bond or reduce the amount payable to the owners corporation out of the bond, if the builder responsible for defective building work was unreasonably refused access to the strata parcel for the purpose of rectifying defective work.

The timelines and deadlines set out in the Act are not entirely inflexible. The Secretary has the power to extend the time for the doing of any act, upon the application of one or more of the ‘parties’. It appears the Secretary will be very busy in this regard.

When will the New Scheme Commence?

The latest news on this from the Department of Finance, Services and Innovations is 1 July 2017. It will only apply to new strata developments constructed under contracts entered into on or after the commencement date of the Act. These may be residential or mixed use.

As the developer bond and post completion inspections regime cuts in just prior to the issue of the occupation certificate, there is plenty of time for strata building inspector panels to be established and builders and developers to familiarise themselves with the new arrangements.

Implications

First and foremost, developers and builders will need to come to grips with a new and complex statutory regime.

Whilst the Act requires a developer of a strata scheme to provide a 2% building bond, we expect to see building contracts being amended so as to require builders to provide the bonds, therefore being financially responsible for their own defective works for up to 24 months after completion.

It is also conceivable that developers will pass on responsibility for the co-ordination of the inspections and liability for the fees of the Secretary and building inspectors to head contractors.

Anticipate extended defects liability periods for at least the kind of work the Secretary will require to be reported upon in the interim report.

The demand for building consultants will sky-rocket. Current resources will need to be enhanced to meet the anticipated demand.

Conclusion

The new scheme is original and unique. Unlike security of payment, mandatory insurance, retention trusts and the like, it is not based upon initiatives in other countries or jurisdictions. The new scheme is therefore untested. A bold but administratively heavy intervention. NSW is the guinea pig.

There will be teething problems and objections which will be closely monitored by other jurisdictions to see if the new scheme holds the key to unlocking better outcomes for apartment owners and enhancing confidence in multi-level apartment work.

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